Bad Credit Mortgage Loans – Six Ways to More Skillful Borrowing

The web abounds with bad credit mortgage loans and articles. And people are often confused by articles they have read or stories they have heard that say that it is almost impossible in certain cases to get a bad credit mortgage loan with the current market. Or that all lenders have about the same rates and mortgages are all about the same.

In reality, most people don't do enough research to get the right information before they decide to apply for a mortgage or refinance. And if you are in need of a bad credit mortgage loan then this article is even more important, because there are a lot of unscrupulous lenders out there that will gladly take advantage of your situation.  Here are eight things you need to know for more skillful borrowing:

1.    Be Prepared

The first thing you must know before applying for a bad credit mortgage loan or home refinance is how much you can afford to spend before you even begin your search. Carefully go over your credit history by requesting a copy of your credit report.

It is estimated that 79% of all credit reports contain errors, so take care of those first. Most small errors can be cleared up by sending a letter and proof of the error to the credit bureaus. However, major errors should probably be handled by a credit attorney like Lexington Law. Lexington works on a month-by-month basis so you can use their services to take care of the major errors and then cancel them when you are done.

Your lender will base your loan on your FICO Score - a mathematical model created by the Experian credit bureau as a tool for lenders to use in evaluating the risk associated with lending you money. If you don’t understand how credit scores work and want more information you can click here for a free “credit education”

Your FICO Score is compiled from a series of questions based on your credit report and your debt-to-income ratio. For a glossary of mortgage terms like this you can visit our mortgage terms page. It will greatly expedite the loan application if you have your credit report and your debt-to-income ratio on hand before applying.

To figure out your debt-to-income ratio divide your monthly debts (for a simple budget worksheet you can click here) by your gross monthly income. For instance – if all your bills total $2,000 and you earn $3,000 monthly your debt-to-income ratio is 66%. Most lenders want your debts to be below 50% of your income.

2.    Know What Can Affect Your Loan

Your credit history and debt-to-income-ratio both affect the your FICO Score. The higher your score the better interest rate you can expect. If you have good credit and your monthly income far surpasses your monthly debt obligations you most likely will get approved at a lower interest rate. If you have a low FICO score then you will need to work with a lender that specializes in bad credit mortgage loans. Your interest rate will be higher.

The other factor to consider is what you can afford as a down payment (if you are buying a new house) and/or how much equity you have in your existing home (if you are refinancing).

3.    Shop   Shop   Shop

Contact more than one mortgage company to compare loan products and rates.

One of the biggest mistake that most consumers make when shopping for a loan is to only contact one lender. Consider this - would you only go to one dealership if you were buying a new car? Mortgages, like car prices, are negotiable. The best way to shop for a bad credit mortgage loan or refinance (or even a good credit one) is to request comparable quotes from several brokers. By shopping your loan and negotiating the rate you will get you the best possible loan.

4.    Know Which Loan Best Fits Your Needs

There are advantages and disadvantages to every loan – doubly so for bad credit mortgage loans.  A 30 year fixed is always a good way to go for a mortgage loan, but a home equity line of credit (HELOC) or a second mortgage are both good options instead of a straight refinance. Make a point to find out what all your options are and choose the best loan for your needs.

5.    Determine The Total Loan Costs

To get the best loan you need to know the annual percentage rate (APR).  The lower interest rate may not be the best loan. Especially if you’re applying for a bad credit mortgage loan.

The lender usually charges an initial fee for processing your loan - this is called  "points." Don't be confused by a low interest rate if the points are high. It could turn out that your total cost may be more than you thought.

When selecting a fixed-rate loan, the best way to determine which terms are better is to add up the dollars you will pay for interest and fees, including points, over the life expectancy of the loan.

Are points - good or bad?  It really depends on if you are looking at the short term or the long term.  The longer you plan to stay in your home, the more points you can afford to pay to "buy down" the interest rate. Points are deductible, and the lower interest will more than pay for the points over time. These days it is rare for someone to stay in a home 30 years which is the length of most mortgages.

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6.    Know The Ups And Downs of Lock-In Rates

A “lock-in” is a lender's written promise to hold a set rate for a specified time period until the loan is completely processed.  The upside is that this locks in a lower rate when rates are changing daily.  The downside is that lock-ins often cost extra and if rates go down you are locked into the higher rate. This could be a problem because rates are shifting quite a bit at this time.

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